With Dodd-Frank relief near, banks set sights on AML

WASHINGTON — The Dodd-Frank Act gets more attention when it comes to regulatory burden, but the Bank Secrecy Act and other anti-money-laundering statutes arguably present even more of a compliance challenge for bankers.

While Congress is close to a regulatory relief bill directed at changing Dodd-Frank, bankers are hopeful that lawmakers will next turn their attention to anti-laundering issues.

“It always comes up as probably top two or three issues that bankers raise when they talk about stressful compliance burden, cost compliance burden,” said Paul Merski, executive vice president of congressional relations at the Independent Community Bankers of America. The Bank Secrecy Act “is probably in the top three.”

Former House Financial Services Committee Chairman Barney Frank has even suggested that some of the concerns about Dodd-Frank, a bill he co-authored, are misdirected.

"When people complain to me about [Dodd-Frank] these days, they're not really complaining about the bill I worked on,” Frank said in a recent interview. “They're complaining about the Bank Secrecy Act, the Patriot Act. ... A lot of the problems they have are from the sanctions, terrorism, money laundering business, and we didn't do anything about that.”

The Bank Secrecy Act was passed in 1970 and still represents the framework that anti-laundering and counterterrorism regulations are built upon. The Patriot Act, passed in 2001 shortly after the 9/11 terrorist attacks, added more requirements.

Bankers often prefer not to complain publicly about complying with AML and counter-terrorism-financing regulations for fear of appearing unpatriotic. But they are also concerned that the millions of suspicious activity and currency transaction reports filed each year don’t amount to much.

“The perception is that you send these things and no one even looks at them or analyzes them,” said Merski. “That is very time-consuming and costly and the regulators really come down on hard on your [Bank Secrecy Act] compliance. Bankers are scratching their heads and wondering what it all amounts to.”

But Congress could be on its way to the rescue. Combined with new top leadership at the banking regulators, bankers and others in the industry are optimistic changes could be in the offing.

"It’s just an issue whose time has come," said H. Rodgin Cohen, a banking lawyer and senior chairman at Sullivan & Cromwell.

“We hope Congress will take the time to consider this issue, which is long overdue for congressional attention,” said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association.

The Senate Banking Committee is holding a hearing on the issue Tuesday, and after passing a bipartisan Dodd-Frank reform bill last month, lawmakers may be willing to attempt to find more common ground in this area.

“It is important to step back and look at everything and go back to the original goals of the Bank Secrecy Act, which is to get information in the hands of law enforcement so there can be prosecution and investigations,” said John Byrne, president at Condor Consulting and former executive vice president at the Association of Certified Anti-Money Laundering Specialists.

Last year, the House Financial Services Committee held a hearing on a bill by Reps. Blaine Luetkemeyer, R-Mo., and Steve Pearce, R-New Mexico, that would increase the currency transaction report threshold to $30,000 from $10,000, a level set in 1972. The measure would also move the SAR filing requirement to every 180 days instead of the so-called 90-day rule, which was initially intended to be guidance for proactive institutions but has become more of an unofficial requirement.

However, Byrne said, after a push for increases in the currency transaction report thresholds in the 2000s, technology has improved such that it’s not as much of a burden as it once was.

Beneficial ownership

Another measure proposed by Luetkemeyer and Pearce and long championed by Rep. Carolyn Maloney, D-N.Y., would create a federal requirement for companies to disclose who the beneficial owner is at the time of incorporation.

The Treasury Department released a customer due diligence rule in 2016 requiring banks to verify beneficial owners if a person had at least a 25% stake in the newly formed entity.

But the rule could present challenges for banks because some information can be scarce.

“The biggest issue is no matter what you ask the banks to do, if you have states like Delaware, Montana and Nevada that don’t collect enough important identifying information when you incorporate, it is only half the battle,” Byrne said.

The proposed legislation has the backing of 12 financial trade groups that sent a letter Thursday night to Leutkemeyer and Pearce.

The bill would create a federal repository of beneficial ownership information at the Financial Crimes Enforcement Network that banks and law enforcement could access.

“Banks couldn’t just simply rely on what was published, but it would give them a heads-up if they saw something that was suspicious. As a result of that ownership listing, they could go further,” Cohen said. “This would enhance the due diligence. The banks have been deputized as law enforcement agencies in this area.”

Greg Baer, the president of The Clearing House Association, said the bill would "help banks to the extent a company wants to open a bank account, the bank will now have an official source rather than play hide-and-go-seek and investigate that."

Cracking down on money laundering and terrorism financing is the primary reason banks will have to collect names, addresses and tax ID numbers for beneficial owners.

"As a practical matter, for big banks you're talking about hundreds of thousands of accounts," said Joe Lynyak, a partner at Dorsey & Whitney. "The banks have been trying to get prepared for this and the banks understand that they really do have to identify the ownership structure of corporate entities."

The rule applies only to new accounts that are opened, not existing ones, and already there is concern that companies bent on illegal activity will find ways around the rules, which go into effect May 11.

Banks will have to identify the owners of an LLC, for example, but there is no requirement for banks currently to reverify existing accounts.

"Foreigners doing business in the U.S. may have heart palpitations," said Lynyak, in many cases because "they simply don't want to disclose who is the owner and what's going on. It impacts this whole issue of where is the money coming from."

"The concern is going to be making sure that people understand that if you want an account, you have to hand over this information," he said.

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